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Keating 5 Ring a Bell?
McCain's
past collides with the present Wall Street debacle.
By Rosa
Brooks
25/09/08 "LA
Times" - - Once upon a time, a politician took
campaign contributions and favors from a friendly
constituent who happened to run a savings and loan
association. The contributions were generous: They came to
about $200,000 in today's dollars, and on top of that there
were several free vacations for the politician and his
family, along with private jet trips and other perks. The
politician voted repeatedly against congressional efforts to
tighten regulation of S&Ls, and in 1987, when he learned
that his constituent's S&L was the target of a federal
investigation, he met with regulators in an effort to get
them to back off.
That politician was John McCain, and his generous friend was
Charles Keating, head of Lincoln Savings & Loan. While he
was courting McCain and other senators and urging them to
oppose tougher regulation of S&Ls, Keating was also
investing his depositors' federally insured savings in risky
ventures. When those lost money, Keating tried to hide the
losses from regulators by inducing his customers to switch
from insured accounts to uninsured (and worthless) bonds
issued by Lincoln's near-bankrupt parent company. In 1989,
it went belly up -- and more than 20,000 Lincoln customers
saw their savings vanish.
Keating went to prison, and McCain's Senate career almost
ended. Together with the rest of the so-called Keating Five
-- Sens. Alan Cranston (D-Calif.), John Glenn (D-Ohio), Don
Riegle (D-Mich.) and Dennis DeConcini (D-Ariz.), all of whom
had also accepted large donations from Keating and
intervened on his behalf -- McCain was investigated by the
Senate Ethics Committee and ultimately reprimanded for "poor
judgment."
But the savings and loan crisis mushroomed. Eventually, the
government spent about $125 billion in taxpayer dollars to
bail out hundreds of failed S&Ls that, like Keating's, fell
victim to a combination of private-sector greed and the
"poor judgment" of politicians like McCain.
The $125 billion seems like small change compared to the
$700-billion price tag for the Bush administration's
proposed Wall Street bailout. But the root causes of both
crises are the same: a lethal mix of deregulation and greed.
Today's meltdown began when unscrupulous mortgage lenders
pushed naive borrowers to sign up for loans they couldn't
afford to pay back. The original lenders didn't care: They
pocketed the upfront fees and quickly sold the loans to
others, who sold them to others still. With the government
MIA, soon mortgage-backed securities were zipping around the
globe. But by the time many ordinary people began to
struggle to make their mortgage payments, the numerous
"good" loans (held by borrowers able to pay) had gotten
hopelessly mixed up with the bad loans. Investors and banks
started to panic about being left with the hot potato --
securities backed mainly by worthless loans. And so began
the downward spiral of a credit crunch, short-selling, stock
sell-offs and bankruptcies.
Could all this have been prevented? Sure. It's not rocket
science: A sensible package of regulatory reforms -- like
those Barack Obama has been pushing since well before the
current meltdown began -- could have kept this most recent
crisis from escalating, just as maintaining reasonable
regulatory regimes for S&Ls in the '80s could have prevented
that crisis (McCain learned this the hard way).
But, despite his political near-death experience as a member
of the Keating Five, McCain continued to champion
deregulation, voting in 2000, for instance, against federal
regulation of the kind of financial derivatives at the heart
of today's crisis.
Shades of the Keating Five scandal don't end there. This
week, for instance, news broke that until August, the
lobbying firm owned by McCain campaign manager Rick Davis
was paid $15,000 a month by Freddie Mac, one of the mortgage
giants implicated in the current crisis (now taken over by
the government and under investigation by the FBI).
Apparently, Freddie Mac's plan was to gain influence with
McCain's campaign in hopes that he would help shield it from
pesky government regulations. And until very recently,
Freddie Mac executives probably figured money paid to Davis'
firm was money well spent. "I'm always in favor of less
regulation," McCain told the Wall Street Journal in March.
These days, McCain is singing a different tune.
"There are no atheists in foxholes and no ideologues in
financial crises," Fed Chairman Ben Bernanke said last week,
explaining the sudden mass conversion of so many onetime
free marketeers into champions of robust government
intervention. Fair enough. But as you try to figure out what
and who can get us out of this mess, beware of those who now
embrace regulation with the fervor of new converts.
rbrooks@latimescolumnists.com
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